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The majority of midcap banks beat our earnings
expectations: Of the 26 banks we cover, 17 (65%)
reported EPS in line or better than expected. Top line
growth was strong, due to higher net interest income on
further NIM expansion, although OREO costs remain
elevated. Provision expense, in aggregate, was higher
than expected, but was driven by just a small handful of
banks (MI, SNV, and TSFG), whereas 16 of the 26
banks posted lower provision expenses than we were
modeling.
Nonperforming loan growth slows: While the NPL
ratio continued to increase, it was up just 19 bps to
2.90% — slowing from the 41 bps increase in the prior
quarter. We view this positively, as it may be a sign that
credit is stabilizing, albeit at an elevated level.
Fewer negative earnings revisions: Our EPS
changes are evenly distributed between positive and
negative revisions. This alone is a positive given it is the
first quarter that most of our revisions have not been
negative. The upward revisions are primarily driven by
higher net interest income due to stronger NIM, as well
as lower provision expenses at several banks. Our
aggregate provision expense estimate is up much less
than in prior quarters. Conversely, higher OREO-related
costs and further deleveraging remain headwinds.
Attractive industry view; Buy HCBK, WBS, and
ZION: With credit starting to show signs of stabilization
(slowing NPL growth and in line provision expenses at
most banks), we remain comfortable with our Attractive
industry view. We still see the potential for further
capital raises and ongoing credit losses, but believe this
is priced in to most of the stocks we cover. Our top
Overweights are Hudson City, Webster, and Zions. Top
Underweights include CFR, MTB, and WABC.
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